New York (CNN/Money) – Cindy Hockenberry has heard her share of gimmicks taxpayers have used to keep their money from the IRS.
But the spokeswoman for the National Association of Tax Practitioners was floored when a tax planner called to ask if he could claim his late wife's cremated ashes as a write-off.
"I guess the funeral director lost the ashes and he wanted to know if he could take a casualty loss deduction," recalls Hockenberry, an enrolled agent who was so stunned by the proposal that it took her a few moments to tell the tax specialist that while he was understandably aggrieved that his wife's remains had been lost, he nevertheless was unable to write them off.
"Casualty losses are for losses from things like fire or theft," she said. "Besides, how someone would place a value on something like that is beyond me. I told him that I wasn't a lawyer but maybe the funeral director could give him some sort of discount or something."
Annals of tax history rich with tall tales
Welcome to the world of creative tax planning, where no good savings scheme goes untried. Indeed, since the Boston Tea Party of 1773, the annals of American tax history are filled with accounts of individuals who've gone to great lengths to keep their money from the hands of the government. Some attempts have worked, while others have, er, taxed the patience of the IRS and its auditors.
The most commonly abused gimmick? Testing the bounds of so-called un-reimbursed business expenses. Normally, these would include such items as professional dues and fees for tax planning services.
Tax cheats, however, have tried unsuccessfully to deduct everything from dentures (for an actor who needed them so he could speak without hissing) to dog-boarding costs (as a business travel expense for an on-the-road employee) to various articles of clothing – including mink coats – for employees who said they needed to look their best to do their job.
However, none can top the deduction of Chesty Morgan, an enterprising stripper from Detroit, who sought to claim her breast implants as a medical expense. A tax court judge busted Chesty on that one, but he did her a bigger favor by allowing her to write off the operation as an un-reimbursed business expense. (As a medical deduction, Chesty would have only been allowed to write off the operation if her costs exceeded a whopping 7.5 percent of her income. Business write-offs can be claimed if they top just 2 percent of her pay, so they're more valuable.)
The ruling quickly caught the attention of tax professionals nationwide.
"Everyone had something to say about it," recalls Joseph Anthony, a tax preparer in Portland, Ore. "Taxes can get pretty dry sometimes, but when something comes up with strippers, all the guy tax pros can't wait to put in their two cents."
And, of course, once someone gets away with something, everyone wants to try it.
No free lunch
Take the case of the two Minnesota state troopers who went to court in the late 1970's to argue they should be allowed to deduct the cost of their lunch. The court agreed because the troopers were required to eat their midday meal at a specific time of day at a specific restaurant. In other words, because they couldn't brown bag it, they could claim the deduction. The ruling was an exception, however, not a precedent-setting carte blanche. Nevertheless, the case is familiar to many law enforcement types.
"Now, there's an urban legend where police officers think they can deduct $7.50 a day for lunch," said Frank Degan, director of the National Association of Enrolled Agents, the membership group for professionals who defend individuals in tax hearings.
"I was just talking to a practitioner in Ohio who lost a client last week, a police officer, because she refused to let him claim the $7.50 a day," Degan said.
Fluffy doesn't count
One can't blame taxpayers for being disappointed when pros steer them to the straight and narrow. Not so long ago, opportunities to bilk the IRS presented themselves like low-hanging fruit.
Consider this pesky rule: Parents and legal guardians must now provide a Social Security number for their children in order to claim them as dependents. It wasn't until the mid-1980's that the IRS started requiring that number on the 1040 form, and the effect on taxpayers has been sobering to say the least.
"The year the [Social Security number] was required, the number of dependents [claimed by taxpayers] plummeted by something like 7 million," said Gerry Voss of B&G Accounting and Tax Service in Hazel Park, Mich. "People had been deducting their pets."
That's not to say Fido can't be a windfall. There was one case where the IRS allowed a filer to claim the cost of transporting a pet to a new home as a legitimate moving expense. And one entrepreneur was able to deduct cat food as a business expense to attract wild cats in order to deter snakes from a scrap yard. Another was able to depreciate the cost of breeding earth-moving worms.
"That one is from the tax code itself," said Jackie Perlman, a CPA and senior tax research analyst at H&R Block who's studied strange deductions. "An animal that is used in business, in breeding, can be depreciated. It also has to be an animal you purchased."
So, how do you depreciate an earth worm?
"Very carefully," joked Perlman. "But I wouldn't think you would do them individually. You'd depreciate them as a group asset."